Read attached article "The Price Is Right?", Courtois reviews the arguments and evidence for and against the efficient market hypothesis and considers whether the recent financial crisis has caused the hypothesis irreparable damage. She addresses the issue of how policymakers should respond to asset price bubbles and urges them to distinguish between market mistakes and market failure as they devise new financial market regulations. focus on understanding the various terms used in the reading including: • Efficient market hypothesis • Securitization • Subprime mortgages • Economic fundamentals • Anomalies • Behavioral finance • Smart money • Asset price bubble • Disclosure laws • Safety net Consider some of the following issues and discuss them. Make sure to address question #10 about your views of market efficiency.

Discussion

1. What is the logic behind the efficient market hypothesis (EMH)?

2. Why is important to distinguish between public and private information? How does this distinction affect the EMH?

3. Must all investment decisions be rational and based on all available information for the EMH to hold? Explain.

4. Describe the evidence that researchers offer for and against the EMH.

5. Explain how an asset price bubble can be rational, i.e., consistent with the EMH. Why do the EMH opponents argue that this clearly was not the case with the housing and mortgage-backed security price bubbles that brought on the recent financial crisis?

6. What are the arguments for and against policymakers “pricking” an asset price bubble?

7. According to Courtois, how do EMH proponents and opponents fundamentally differ in their view of markets and market prices?

8. Why does she argue that policymakers should make a distinction between market mistakes and market failure as they respond to the financial crisis?

9. Does she conclude that “the financial crisis provided a fatal blow to the efficient market hypothesis?” Why?

10.What are your views about the efficiency of financial markets?